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November 19, 2013

Senate Finance's Baucus Floats International Business Tax Reform Plan

Plan is first in a series of drafts to be released this week on ways to reform the tax code

Senate Finance Committee Chairman Max Baucus, D-Mont. (Photo: AP)

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Senate Finance Committee Chairman Max Baucus, D-Mont., released Tuesday the first in a series of discussion drafts on reforming the nation’s tax code.

The first draft provides a roadmap on how to reform the international tax rules in order to “spark economic growth, create jobs and make U.S. businesses more competitive,” according to Baucus. Other reform discussion drafts will be released later this week.

“Over the past three years, the Finance Committee has examined every aspect of the tax code in an effort to fix a broken system,” Baucus said in a statement.

“Through hearings, option papers and blank slate proposals, we’ve received input from key stakeholders and nearly every member of the Senate. These discussion drafts are the next step. They represent proposals collected throughout this process and provide a path forward on tax reform. Some are Democratic ideas. Some are Republican ideas. The common link is they are all ideas worth exploring.”

Sen. Orrin Hatch, R-Utah, ranking member of the Senate Finance Committee, issued a statement the same day that he had told Baucus that he "would prefer to hold off on releasing any discussion drafts until after the budget conference concludes in order to ensure that tax reform doesn’t become a victim of this partisanship."

“Unfortunately," Hatch said, "the bipartisan desire to overhaul our tax code has become mired in the partisan desire by some to raise taxes under the guise of so-called tax reform in the budget conference negotiations."

Baucus proposed the following changes to the international business tax model:

The draft repeals the deferral system for the earnings of foreign subsidiaries of U.S. companies and replaces it with a system under which all such income is either taxed immediately when earned or exempt from U.S. tax, after which no additional U.S. tax is due. Income from selling products and providing services to U.S. customers is taxed annually at full U.S. rates.

The discussion draft includes two options that apply an annual minimum tax to income from products and services sold into foreign markets. One option applies the minimum tax rate to all such income. A second option taxes such income at a lower minimum tax rate if derived from active business operations and at the full U.S. rate if not.

Passive and highly mobile income is taxed annually at full U.S. rates.

Historical earnings of foreign subsidiaries that have not been subject to U.S. tax are subject to a onetime tax at a reduced rate of, for example, 20% payable over eight years.

The plan eliminates international aspects of the “check-the-box” rule.

The plan addresses base erosion arrangements used by foreign multinationals to avoid U.S. tax.